TEVA: Adaptation of position

All,

Having observed price movements since the S&P rating, we are adapting our position as follows:

We are moving the short leg of our position from the July 20s to the April 22s. We chose the relatively small issue purely to match currencies. Funding and forward selling currencies is not what we do for our paper book. If borrow is a concern, we might switch both legs to the much larger USD issues with in each case the immediately preceding maturities.

This amounts to a slight increase in our net position, but more importantly should provide us with better downside protection. The cheap insurance package we entered into with the 20s only protected us from a short term disaster, in which the company would have to default at short notice. This is indeed a remote scenario, which is why the policy is so cheap…

By contrast, the 22s are 1) beyond the horizon of bond redemptions that the company can conduct from its balance sheet and 2) around the inflection point on the curve where we see the biggest potential for correction to a recovery valuation, if it came to a negative scenario. In our view the behaviour of these bonds will far better reflect any downside to TEVA that does not result in an immediate implosion.

Regarding the S&P rating:

We think S&P got it roughly right, even if their backward looking rating does not reflect the more important outlook. The company can stomach a $2bn fine without material trouble. Beyond that and depending on timing of those fines / payments / concessions the company will have to slow down R&D and M&A, which will impact profitability / debt capacity in the longer term.

We also agree with S&P that any certainty afforded to the market by a near-term settlement would be a positive signal on its own. S&P are considering a multi-notch- downgrade only if the liabilities exceed 4-5bn, which reflects our thesis too.

With the threat of a downgrade from BB territory into B, the market seems to be (rightfully) anticipating the downgrade and heading for the door before it happens. This negative current (selling / short selling) provides us with yields that are pricing pricing the company at stressed - distressed levels, which are still far off and may not even be reached in a $5bn scenario.

Thus except for a shift of the short leg into the 22s (or an overall shift into the relative USD issues) our position remains unaltered.

Wolfgang